Brian Shannon on the Misuse of Moving Averages
- Joshua M Brown
- June 22nd, 2012
In absence of any kind of clarity on the economic or fundamentals front (recession? no recession?), everyone’s become an armchair technical analyst these days. My daughter’s bus driver asked me “can the Spoos hold 1285?” this morning. I told him to STFU and get my kid to kindergarten.
Anyway, technical analysis is not an exact science, breakouts and breakdowns fail all the time and not every head has a pair of shoulders attached to it. And don’t even get me started on levels – they are guideposts in a murky wilderness, not brightly-lit marquee billboards on the Vegas strip. The very best traders use these tools for risk management, not predicting the future. My friend Brian Shannon at Alpha Trends sets the record straight this morning:
Lately we have seen a lot of technical analysis misused. From a couple of closes below the 200 day moving average being interpreted as bearish, to a couple closes above the 50 day moving average being interpreted as bullish, or believing that one can buy the break above the “neckline” if the inverted head and shoulder pattern and then kick back and wait for the price objective to be met. These examples of ‘failed technical analysis’ are “proof” by doubters that technical analysis is useless….
As I often point out, moving averages should not be used as a stand alone tool, but they give us a great reference point to compare price to. We want to objectively observe how price acts around those levels on shorter term timeframes
In essence – a break above the 50-day is bullish, sure, but not necessarily if it’s a break in the context of a larger downtrend. This ain’t checkers, this is chess.
I suggest you listen to the man before spouting off if you’re a TA tourist (as I once was myself). He literally wrote the book on this stuff.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.